(Bloomberg) -- The European Central Bank should continue raising interest rates by large increments at its meetings in October and December before reassessing and possibly shifting to a slower pace, Bank of France Governor Francois Villeroy de Galhau said.
The ECB has taken an aggressive stance against inflation at recent meetings, hiking by 125 basis points in two steps in July and September. Villeroy has supported the hawkish moves and backs further increases to get the deposit rate from 0.75% to “below or close to” 2% by the end of the year -- a level he says is a neutral setting. Beyond that, he is urging more caution.
“We should get there without hesitation,” Villeroy said in an interview with Dutch newspaper NRC published on Tuesday. “We could start then a second part of the journey, a more flexible and possibly slower one: I don't say that rate hikes will stop there, but we will have to comprehensively assess the inflation and economic outlook.”
The comments point to a looming debate at the ECB over how to reconcile the fight against inflation with protecting an economy at increasing risk of recession. Predicting the institution's future moves has become more difficult as the volatile backdrop led it to drop formal guidance and take a meeting-by-meeting approach to policy decisions.
Villeroy said forecasting how much the ECB will raise rates at any one time is a “betting game” as policy makers have a broader approach, looking also at financial conditions for firms and households. Those conditions have “recently tightened significantly due to markets deterioration,” he said.
The French central banker also tempered concerns about the financial sector as rates increase. As the ECB hikes to combat core inflation, it will boost banks' net income, he said.
“European banks are hence more solid than feared by some,” Villeroy said.
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